Articles > Franchising

5 things that can make a franchise fail

October 8, 2020   Brigid NelmesPhilip Evangelou

Understanding why others failed is often crucial to your own success. Although opening a franchise is often seen as a more safe and reliable route to success than opening your own business, there are a number of reasons why a franchise can fail.

Here are 5 key reasons:

1. Unrealistic expectations

A franchisee may have unrealistic expectations about their ability to run the franchise. Firstly, the franchisee may not have the necessary business skills to operate the franchise. A passion and interest in the business from a customer’s perspective does not always translate to an ability to run it. Secondly, the franchisee may have underestimated the work and time needed for the franchise to succeed.

2. Insufficient working capital and reinvestment

Tied into unrealistic expectations is the failure to pragmatically consider the amount of working capital required to get the franchise up and running. A failure to strategically reinvest in the franchise to secure its position and help it grow can impact the success of the franchise.

3. Lack of research

A lack of research about the business and market can contribute to failure. This is where the Disclosure Document, Franchise Agreement, Franchising Code of Conduct and the advice of other franchisees is crucial to understanding what is required to succeed and developing a realistic business plan. 

4. Not following the system

Successful franchising is based on uniformity, not individuality. Opening a franchise does not bring with it the independence and control of opening your own business. Some franchisees want to do things their own way, rather than following the franchise manual, which can sometimes undermine the franchise brand altogether and potentially breach the Franchise Agreement. In saying that, fresh ideas may be welcome and can often improve the success of the franchise network overall, it is just necessary for the franchisee to work alongside the franchisor.

5. Failure to develop

Although a franchise is often an established brand, it still needs to develop with the market to remain relevant and meet customers’/clients’ needs. A lot of business development may come from the franchisor, but it is crucial that the franchisee is not complacent and notices when aspects of the business are no longer working well so that they can adapt. 

Key takeaway

A franchise can fail for numerous reasons and these are only five common problems. A common thread running through these issues is a lack of understanding, whether about business generally or the franchise specifically. Significant and ongoing research must go into every successful franchise.

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About Brigid Nelmes

Brigid NelmesBrigid is a legal intern at OpenLegal, working with our legal content team. She is currently completing her Bachelor of Laws and Bachelor of Arts (International Studies) at the University of Technology Sydney. Her interests are in digital/privacy and startup law.

About Philip Evangelou

phillipPhil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.